Yesterday's news of the bailout of AIG and the string of announcements of financial companies in distress brings credit issues into sharp focus. What is the accounting profession doing? Are financial reporting practices broken? Are IFRS Standards up to the challenge and if they are not up to the challenge then what needs to be done to fix them? How soon can this be done? What is the role of the political system will new regulations be forced on companies requiring even more disclosure? How can transparency of information be balanced with understandability of the information presented?
These are only some of the questions. Financial reporting cannot be blamed for the mess, although it is not off the hook entirely. The world has become so complicated that even the "experts" really do not fully understand the interrelationships. It is too easy to assume the world will be more or less the same as before. We accountants use a "going concern" assumption and nobody wants to discuss the worst case scenario of a melt down. Would such disclosures and discussions not themselves lead to "self fulfilling prophecy"?
Last April the G-7 and the Central Bankers got together to discuss the problems and what can be done. It's worth revisiting this. I am sure there are a lot of people revisiting it!
The G-7 asked the Financial Stability Forum (FSF) in October 2007 to undertake an analysis of the causes and weaknesses that have produced the turmoil and to set out recommendations for increasing the resilience of markets and institutions going forward. The recommendations from the FSF report last April are summarized here.
The report tasked the IASB as follows
The International Accounting Standards Board (IASB) and other relevant standard setters should initiate urgent action to improve the accounting and disclosure standards for off-balance sheet entities and enhance its guidance on fair value accounting, particularly on valuing financial instruments in periods of stress.
In response to this call for action the IASB set up a Working Group and the progress of the Working Group can be followed on the IASB site - see http://www.iasb.org/About+Us/About+IASB/Credit+crisis.htm
In response to the fair valuation problems under illiquid conditions the IASB Expert Advisory Panel has issued a draft on Measuring and disclosing the fair value of financial instruments in markets that are no longer active.
The IASB also has the following projects in progress
Dealing with "off balance sheet" issues....
The Consolidation project identifies when an entity should be brought on to another entity’s balance sheet, whilst the Derecognition project examines when assets should be removed from the balance sheet.
Dealing with disclosures about financial instruments....
There is a review of IFRS 7 in progress.
A recent article in the CFO Magazine "Tweedie: Don't Blame Fair Value for the Crisis" by Mary Leone does a good job of summarizing these projects and provides information and links to FASB projects in this area.
In Canada we need to follow these projects closely as part of our conversion to IFRS. I am concerned that some of the results may be too late for our January 2011 conversion date and that the FASB/IASB convergence may be a "bridge too far for us" - even though the convergence plan is aggressive. At best we will have to consider potential changes very close to our date. Remember for calendar year companies the date of transition under IFRS1 is January 1, 2010 and you will have to track IFRS reporting during 2010! Let's see maybe I am being too negative on this.